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Chapter 23: Q12Q (page 1372)

Question: Your roommate is puzzled. During the last year, the company in which she is a stockholder reported a net loss of \(675,000, yet its cash increased \)321,000 during the same period of time. Explain to your roommate how this situation could occur.

Short Answer

Expert verified

Answer

The business entity has an increase in cash despite the net loss because the increase in cash might bedue to factors such as the sale of assets and securities.

Step by step solution

01

Definition of Net Loss

A net loss can be defined as the expenses incurred in a specified period higher than the revenue generated during the same period. This loss can be carried forward to succeeding years for getting tax advantages.

02

Increase in cash despite a net loss

The business entity can increase cash even if it reports a net loss. Such a situation arises due to the following factors:

  1. Higher cash revenue as compared to cash expenses.
  2. Cash is generated through the sale of investment or fixed assets.
  3. Cash is generated from the issuance of equity or debt securities.

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Most popular questions from this chapter

Broussard Company reported net income of \(3.5 million in 2017. Depreciation for the year was \)520,000, accounts receivable increased \(500,000, and accounts payable increased \)300,000. Compute net cash flow from operating activities using the indirect method.

Question: What are some of the arguments in favor of using the indirect (reconciliation) method as opposed to the direct method for reporting a statement of cash flows?

(Computation of Operating Activities鈥擠irect Method) Presented below are two independent situations.

Situation A: Annie Lennox Co. reports revenues of \(200,000 and operating expenses of \)110,000 in its first year of operations, 2017. Accounts receivable and accounts payable at year-end were \(71,000 and \)29,000, respectively. Assume that the accounts payable related to operating expenses. (Ignore income taxes.)

Instructions

Using the direct method, compute net cash provided by operating activities.

Situation B: The income statement for Blues Traveler Company shows cost of goods sold \(310,000 and operating expenses (exclusive of depreciation) \)230,000. The comparative balance sheet for the year shows that inventory increased \(26,000, prepaid expenses decreased \)8,000, accounts payable (related to merchandise) decreased \(17,000, and accrued expenses payable increased \)11,000.

Instructions

Compute (a) cash payments to suppliers and (b) cash payments for operating expenses.

The income statement of Vince Gill Company is shown below.

VINCE GILL COMPANY

INCOME STATEMENT

FOR THE YEAR ENDED DECEMBER 31, 2017

Sales revenue \(6,900,000

Cost of goods sold

Beginning inventory \)1,900,000

Purchases 4,400,000

Goods available for sale 6,300,000

Ending inventory 1,600,000

Cost of goods sold 4,700,000

Gross profit 2,200,000

Operating expenses

Selling expenses 450,000

Administrative expenses 700,000 1,150,000

Net income \(1,050,000

Additional information:

1. Accounts receivable decreased \)360,000 during the year.

2. Prepaid expenses increased \(170,000 during the year.

3. Accounts payable to suppliers of merchandise decreased \)275,000 during the year.

4. Accrued expenses payable decreased \(100,000 during the year.

5. Administrative expenses include depreciation expense of \)60,000.

Instructions

Prepare the operating activities section of the statement of cash flows for the year ended December 31, 2017, for Vince Gill Company, using the indirect method.

Differentiate between investing activities, financing activities, and operating activities.
See all solutions

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